Iceland leader rejects UK, Dutch compensation bill

REYKJAVIK, Jan 5 (Reuters) – Iceland’s president refused to sign a bill to repay Britain and the Netherlands more than $5 billion for money lost by their savers when its banks collapsed, calling for a referendum and sparking a political crisis.

President Olafur Grimsson’s rejection of the unpopular Icesave bill on Tuesday put aid from international lenders and his country’s aspirations to join the European Union in serious jeopardy, analysts said.

A Finnish official said the decision was likely to delay a loan of 1.8 billion euros from Nordic countries, part of an aid package led by the International Monetary Fund (IMF) which is vital the country’s economic recovery.

Only once in the republic’s 65-year history has a president, whose post is largely symbolic, refused to sign a bill into law. The constitution requires the issue to be put to a public vote if the president refuses to sign.

“It has steadily become more apparent that the people must be convinced that they themselves determine the future course,” Grimsson told a news conference.

Nearly a quarter of Icelandic voters, angry at the prospect of paying debts they feel are both onerous and unfair for the 2008 banking collapse, had petitioned the president to reject the bill.

Icelandic critics say Britain and the Netherlands are using their EU veto and IMF voting power to bully a small country’s taxpayers into reimbursing savers who imprudently poured money into Icesave, a private firm that offered high interest rates.

CONSTITUTIONAL CRISIS?

The Dutch government said it was “very disappointed” and would demand an immediate explanation. Britain said it would consult with Iceland and take up the matter in the EU.

The cost of insuring Icelandic debt against default was little changed, with five-year credit default swaps at 428 bps after the news, compared with 427 on Monday.

Prime Minister Sigurdardottir, who had laboured for months to come up with a solution, vowed to soldier on.

“It is debatable whether it is politically and constitionally correct for the president to use his right to submit the issue to a national referendum when it concerns an international issue such as Icesave where the goverment seeks to honour its international committments,” she said.

Analysts said the president’s move plunged the country into fresh political turmoil.

“We are dealing here with a considerable dilemma and considerable constitutional crisis, the reason being that our constitution is weak and does not spell out clearly the role of the president,” said Baldur Thorhallsson of the University of Iceland.

After weeks of heated debate, Iceland’s parliament late last month narrowly passed the bill in a move seen as a boost to the country’s hopes of swift EU entry and of getting its shattered economy back on track.

“This is a big surprise … it’s very market negative,” said Petter Sandgren, head of money markets at SEB.

“I assume it would affect the IMF package.”

SAVERS ALREADY COMPENSATED

The bill authorises repayment to Britain and the Netherlands for compensation they have already given savers who lost money in failed Icelandic bank accounts.

Taxpayers are furious they could be left to foot the bill for mistakes made by financial firms operating under the watch of other national regulators.

Critics say the bill would lumber Icelanders with an extra debt burden equivalent to 40 percent of gross domestic product or $18,000 per citizen, including interest payments.

Iceland’s main banks — Kaupthing, Glitnir and Landsbanki, operator of the high-yield Icesave accounts — all imploded as the global financial crisis left them unable to service the huge debts run up in the course of a rapid expansion overseas.

The financial meltdown caused trade in the Icelandic currency to collapse and spawned a withering recession that has left the volcanic island nation dependent on IMF-led aid.

The row with Britain and the Netherlands over Icesave held up initial IMF payments and made it difficult for the country to relax exchange controls put in place to shelter the currency.

“You can’t hold a referendum in three days and this issue is pressing. The IMF will have to put on hold payment of any future tranches of aid until we have a ‘yes’ vote,” Danske Bank analyst Lars Christensen said.